LPL’s big National Planning Holdings buy is a high-stakes bet

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If LPL Financial retains about three-quarters of National Planning Holding’s business after its purchase of the 3,200-advisor network, CEO Dan Arnold will be happy.

“From a historical standpoint, we would look at a 70% number as being a solid, kind of down-the-middle outcome in terms of retention,” Arnold told analysts Wednesday, a day after LPL announced it would pay $325 million for NPH.

The excitement of the day’s news, however, will soon yield to a difficult transition period full of open questions.

With this acquisition, the largest independent broker-dealer, which already has more than 14,000 advisors, is on track to surpass the largest U.S. wirehouse Morgan Stanley’s 15,777 in terms of number of advisors.

The growth will not come cheaply. On top of the $325 million purchase price, LPL may need to pay hundreds of millions of dollars more to finish the transaction and pay for the onboarding. For the bet to pay off, the IBD will need to convince thousands of NPH brokers to stay, plus keep its own brokers.

In his call with analysts, Arnold argued that the firm’s robust onboarding plans will ease the pains and costs of transitioning current NPH advisors, and that the company sees a smooth road ahead.

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Analysts expressed doubts about the ease of the onboarding process. Others raised concerns about broker attrition from both firms. One analyst said during the call that NPH lost 15% of its advisors over the past four and a half years.

A spokeswoman for NPH referred questions about its headcount to LPL, where a spokesman said he could not comment on NPH matters. The network lost at least 141 advisors, or 4%, between 2014 and 2016, according to data the firm disclosed as part of Financial Planning’s annual FP50 list.

Others pointed out that LPL has itself lost 121 advisors this year, and the two firms vary widely on the mix of their brokerage and advisory assets. Arnold refutes those concerns.

LPL’s deal with NPH allows for “an automated, large-scale, negative consent process that makes it easier to move advisors and client assets,” said Arnold, himself a former UVEST Financial Services executive who joined LPL when it acquired the firm in 2007. The negative consent capability means that current NPH clients will have their assets transferred automatically, unless they object, rather than asking first for their permission to move the assets.

“Altogether, our streamlined and accelerated onboarding process should be an appealing way for NPH advisors to move on to our platform,” Arnold added.

LPL’s bet is a large one. The price tag could rise to as much as $448 million if LPL receives over 93.5% of NPH’s business. It will not have to pay former NPH parent Jackson National Life Insurance more if LPL retains less than 72% of NPH’s business.

Arnold and CFO Matt Audette laid out plans for wooing advisors from NPH’s four member firms — National Planning, Invest Financial, SII Investments and Investment Centers of America. LPL expects to spend at least $40 million to $60 million on closure and transfer fees, technology and other help.

LPL and NPH negotiated lower rates for such fees with NPH’s current clearing firms, and LPL will pay the fees directly, Audette said. Loans to NPH advisors could push the total onboarding costs to $100 million.

NPH advisors’ client account forms will also pre-populate on LPL’s platform through automation tools, according to Arnold. The incoming advisors, who LPL intends to switch over in two waves by the end of the first quarter of 2018, won’t have to repaper client assets themselves or pay the fees, Audette said.

“We plan to spend the money necessary to help advisors with the financial cost of moving on to our platform,” he said. “We estimate that this assistance will be less than what we pay for a typical recruit, as our process removes two of the largest costs that advisors typically incur when switching firms.”

LPL may also lose some current LPL advisors. Howard Diamond, managing director of recruiting firm Diamond Consultants, has spoken with advisors from both firms who are currently assessing their futures, he says. He cites Morgan Stanley’s purchase of Smith Barney as an example.

“It didn’t go smoothly, and they had deeper pockets and were better prepared to do it than LPL,” Diamond says. “Any time you have that number of advisors, things fall through the cracks.”

On the other hand, LPL can refer to past acquisitions for guidance on how to bridge the gaps between its business model and that of NPH. Arnold mentioned LPL’s purchases of his former company and several Pacific Life Insurance broker-dealers the same year.

In the case of NPH, brokerage accounts make up about 75% of its client assets, compared to about 55% at LPL. Arnold conceded NPH also receives more of its commission revenue from variable annuity sales than LPL.

At the same time, the average production and client size among advisors at the two firms closely resemble each other, he said. Both also serve institutions alongside individuals. They also offer very similar payout grids, according to Arnold.

“You’ve got a lot of commonality in terms of how they approach the business and how we do,” he said.

“When those advisors move over, and they’ve had a higher mix of brokerage business in the past than we did, we do see that the mix shift evolves over time and begins to look and line up more like our mix on our platform.”

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Independent BDs Independent advisors Recruiting Business development Investment technology Dan Arnold LPL Financial National Planning SII Investments